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NEWSLETTER 17, December 2003 Pricing in the Global Garment Industry

If a pair of Nike sport shoes retails for approximately $100 and the worker who puts the shoe together earns about $1 out of that $100, why can't the money be distributed more equitably, so that working conditions are improved and the worker earns more? Labor rights campaigners have been asking questions like this for more than a decade. "For a number of years whenever we talk about strategies to improve conditions in the garment industry, pricing emerges as a key issue," explained Ineke Zeldenrust of the Clean Clothes Campaign (CCC) International Secretariat at this seminar. "Buyers say suppliers don't want to improve, suppliers say buyers don't want to pay more for improvements, and governments say they can't raise the level of the minimum wage because corporations will relocate. So as a campaign interested in improving working conditions we have to better understand how this key issue works - it's the only way we can develop effective strategies," said Zeldenrust, speaking to a group of nearly 50 people from 22 countries in Eastern and Western Europe, North and Central America and Asia, from non-governmental organizations (NGOs), trade unions, and multi-stakeholder monitoring and verification initiatives at a seminar organized by the CCC and the International Restructuring Education Network Europe (IRENE) in collaboration with EED, Germany.

What the experts had to say

Michiel Scheffer, of Noéton Knowledge Management in the Netherlands, highlighted the key trends affecting the garment/ textile industry. He talked about the enormous impact restructuring has already had in Europe and America and went on to consider the impact on developing countries of the phase out of quotas when the multi-fiber arrangement (MFA) expires in 2005. He sees a future where brands want one-stop shopping with garment production located as close to textile production as possible with fewer direct suppliers. Scheffer predicts China and India will win out whereas Sri-Lanka and Pakistan will lose market share. Countries that pay slightly higher wages, like Thailand and Malaysia, are stuck somewhere in the middle in terms of their prospects, according to Scheffer. "They're very vulnerable."

If we accept that pricing models are important, then we have to accept that the business model is important, said Simon Zadek, of the UK-based AccountAbility. If wage levels and other standards related to pricing are to be improved, current business models which are at odds with code compliance need to be changed. "The governance process in the company is detached from codes - there's a range of dysfunctions," observed Simon Zadek of AccountAbility.

Sebastian Siegele, of Systain Consulting in Germany, said that understanding the reality of pricing issues is much more complicated than the campaigning point that workers earn only 1% of the selling price of a garment. He explained that the selling price is determined by the market and everybody in the supply chain is trying to lower their costs and increase their profits. Within this, the retailers have the strongest market power and make the biggest profits. The workers are at the low end of the system, with limited power.

In between, the buyer, who makes sourcing decisions, is mainly responsible for increasing profits and achieves this through adjustments in buying prices, delivery times, quality and styles. The buyer's counterpart is the supplier, and together they negotiate the price. The suppliers aim to cut costs in order to increase their own profits and have to consider direct costs (such as material, labor costs, transport and commission), indirect costs that are not linked to the product (such as overhead costs, designing, samples, and administration) and macro costs (taxes, quotas, tariffs, infrastructure, education). Many suppliers do not have any knowledge of the relationship between these different costs. Some do not think about cost calculation at all. They focus on the market price and negotiate blindly, leaving the workers to pay the bill. Siegele gave an example of a company that increased the working week from 48 to 54 hours with only a 3% productivity increase; output per hour actually decreased 12% and labor costs per piece increased 13.6%.

So where does this leave the workers?

Participants noted that workers have no choice but to work long hours, because their wages are so low; and in some cases (participants gave Mexico and Pakistan as examples) overtime is mandatory. If hours are cut to come into compliance with a code of conduct and productivity goes up, as in one case in Thailand that was mentioned, workers should not be the ones to suffer by receiving lower wages, observed one participant. Siegele agreed that these are problems and that workers have to be involved in such decisions.

Placing responsibility with buyers, not suppliers

Jurk, a Dutch garment design and retail company, produce their garments in India in a socially-responsible way. This led them to the Fair Wear Foundation. Jurk began to work with a local Indian NGO to develop programs to get children into schools and women into training programs, and this has been going well. Implementing the FWF code however, has been very difficult for a variety of reasons, both local and more global factors.

The experience of Gloria Kok, of Jurk, makes her call for stronger provisions in codes to address the behavior of buyers. "Structures are hard to change," she said, "and what I see that is troubling is that companies that have signed codes have actually gotten worse."

Various other participants noted the limited power of suppliers and the need to push for responsibility at the top end of the supply chain. A major concern is that retailers continue to move from locations where workers are organized or organizing to other factories, other parts of the country, or other countries where there is no union organizing, remarked Junya Lek Yimprasert of the Thai Labor Campaign. In her view, this is why China is attractive to buyers.

Other ways to pressure companies for improvements

There are useful points of leverage to push for change that have been under-explored, said Zadek. While "front door" entry points, such as reputation and brand have been targeted by campaigners, "back door" entry points, such as investor relations have not received as much attention. In terms of building compliance into the business model, Alice Tepper Marlin of Social Accountability International (SAI) said that SAI has suggested that their member companies increase their minimum lead time when placing an order. This can make an enormous difference in terms of overtime demands. The U.S. toy retailer Toys-R-Us is one company that is trying this out.

When considering how to act, Scheffer said it is useful to look at the development of the Fair Wear Foundation in the Netherlands. "We saw the coming together of the NGOs, the trade unions, and the consumer groups - combining the noise, enthusiasm, and aggression of NGOs and the money of trade unions," remembered Scheffer, who was one of the original industry association negotiators. "The industry association would have had to shell out a lot more money to have the same impact on public opinion." "Make noise," he concluded. "You have more freedom to do that than anyone else."

For the full seminar report please see:
www.cleanclothes.org/ftp/03-05-pricingreport.pdf

For more information on the Fair Wear Foundation see:
www.fairwear.nl